AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (3) TMI 1134
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee undertakes processing of latex into value added forms like centrifuging latex. Income from sale of centrifuging latex, a portion of the same is liable to be taxed under the Central Income-tax. For the assessment years 2012-2013 and 2013-2014, the returns were filed by the assessee. In the said returns filed, the assessee had claimed deduction under Rule 7A(2) of the Income-tax Rules, amounting to Rs. 98,62,206 and Rs. 1,74,39,892 for assessment years 2012-2013 and 2013-2014, respectively. The Assessing Officer disallowed the claim of the assessee by following the judgment of the Hon'ble Kerala High Court in the case of M/s.Rehabilitation Plantations Limited v. CIT [(2012) 251 CTR 343 (Ker.)]. 5. Aggrieved by the orders passed by the Assessing Officer disallowing the claim of deduction under Rule 7A(2) of the I.T.Rules, the assessee preferred appeals to the first appellate authority for the assessment years 2012-2013 and 2013-2014. The CIT(A) after elaborately analyzing and quoting the relevant portion of the judgment of the Hon'ble Kerala High Court in the case of M/s.Rehabilitation Plantations Limited (supra), decided the issue against the assessee. 6. The asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the total income. 1. The finding of the Kerala High Court could be found to be inconsistent with the provision and reality in plantation based on the following arguments" The findings in the judgment are narrated in bold: (a) Rule 7A(2) only provides for deduction of expenditure for infilling through replacement of dead trees or other trees that have become useless. The rule nowhere mentions "infilling". Instead the rule provides for - (i) An allowance (ii) For cost of (iii) Planting of Rubber Plants (and not plant) (iv) In replacement of (v) Plants (and not plant) (vi) That have died (vii) Or (viii) Become permanently useless (ix) In an area already planted (x) If such area has not previously been abandoned. It is a provision, both for infilling and re-plantation since the expression (i) That have died or an area already planted, qualifies infilling and (ii) OR Here the word OR is significant since it qualifies two different and separate events, both of which have been understood and considered by the law makers tobe resulting....
X X X X Extracts X X X X
X X X X Extracts X X X X
....set. No doubt that this is an expenditure in planting and developing of plantation upto its maturity but the Act provides for this expenditure as an allowance in computation under Rule 7 A. As submitted above this allowance is in lieu of depreciation. It is also an allowance to offset the loss of income or is in the form of a benefit granted to a farmer to recoup from the earnings the loss of revenue for. a period of 7 years, since the expenses on establishment remains the same irrespective of the extent under cultivation. As such the expenses upto maturity would be eligible as an. allowance for replantation. This is also supported by the decision of the Supreme Court in 41 ITR 751 and 48 ITR 83. (e) Rule 7 A(2) does not cover expenditure incurred for re-plantation of an area but only expenditure for infilling through replacement of dead trees or trees that are become useless which is not the case here. The wording in the Rule does not give an interpretation so as to restrict it to infilling. If it was so, the word "infilling' was not alien for the law makers and could have imposed such a restriction at the time of drafting. This can only be seen as a....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The Supreme Court held "The proviso allows deduction of the cost of replanting bushes in replacement of bushes which died or became permanently useless in an area already planted. It deals with the cost of planting bushes and not the expenses incurred in the upkeep and maintenance of bushes already planted". The Maintenance Expenditure is therefore clearly allowable as a Revenue Expenditure under Section 37 of the IT Act and is not be considered under Rule 7 A(2) (iii) In any event Rule 7 A applicable to Rubber is on similar lines as Rule 8 of the Income Tax Rules, 1962 applicable to Tea under which income derived from the sale of tea grown and manufactured is to be computed as if it were income derived from business and 40% of such income is deemed to be income liable to tax under the Income Tax Act 1961 and the balance 60% is deemed to be income liable to Agricultural Income Tax. (iv) In making such computation of income from tea the Income Tax Officer grants benefit for an allowance of the cost of replanting of tea bushes under Rule 8 (2) of the Income Tax Rules which is extracted below:- "In computing such income, an allowance shall be made....
X X X X Extracts X X X X
X X X X Extracts X X X X
....les, books, scientific apparatus and surgical equipment used for the purpose of business or profession but does not include tea bushes or livestock", In the memorandum explaining the amendment (reported in 212 ITR (St) 356 it was explained as under.- "Amendment of section 43(3) of the Income Tax Act to exclude plantations and livestock from the definition of plant: Under subsection (3) of section 43 the term "plant" includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of business or profession. In certain judicial pronouncements, it has been held that the term "Plant" includes tea bushes and, therefore, they would also be eligible for depreciation under section 32. Rule 8(2) of the Income Tax Rules, already provide for a deduction in respect of the expenditure incurred on replacement of old tea bushes by an assessee. The deduction under rule 8(2) is allowed in lieu of depreciation. As a result of the judicial pronouncements, double deduction is now being claimed on the tea bushes, one as replacement cost and then as depreciation allowance. " With a view of setting at rest the aforesaid contro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ty or for rejuvenation or consolidation of areas used for cultivation of rubber, coffee, cardamom or such other commodity as the Central Government may, by notification in the Official Gazette, specify". (x) It is thus further clear that by linking Rule 7 A(2) with section 10(31), the legislature wanted to give full deduction of cost of re-plantation of rubber under Rule 7 A(2), even though subsidy itself is not taxable. (xi) It is thus clear that Rule 7 A(2) of the Income Tax Rules 1962 provides for 100% deduction in respect of the expenditure incurred on cost of replanting rubber plants in replacement of plants that have died or become permanently useless in an area already planted and this deduction is allowed in lieu of depreciation. The only condition is that replanting of new rubber plants should be in replacement of old rubber plants in an area already planted and such area has not been previously abandoned. When the rubber trees standing in an area becomes old and unyielding after giving yield for several years together, the same should necessarily be replaced with new plants to continue the plantation. The use of the words "if such area has not previously....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o as Annexure V which is at pages 19 to 35." 7. The learned Departmental Representative supported the orders passed by the Income-tax authorities. 8. We have heard the rival submissions and perused the material on record. The Hon'ble Kerala High Court in the case of M/s.Rehabilitation Plantations Ltd. (supra) had categorically held that the expenditure incurred for planting and development of plantation up to maturity has to be necessarily capitalized and it cannot be allowed as revenue expenditure. The relevant finding of the Hon'ble High Court reads as follows:- "After hearing both sides, we are unable to accept the case of the assessee for more than one reason. In the first place, expenditure covered by Rule 7A(2) does not cover expenditure incurred for replantation of an area. On the other hand, Rule 7A(2) only provides for deduction of expenditure for infilling through replacement of dead trees or other trees that have become useless, which is not the case here. As already stated by us, Rule 7A(2) is in the same line as Rule 7B(2), which provides for replacement of dead or old or unyielding coffee plants in yielding coffee plantation, and Rule8(2) which provides....